Investing in housing: Accounting & Business

Posted on June 8, 2009 · Posted in Accounting & Business

The UK has a housing crisis with several dimensions.  Construction companies are going broke.  Homeowners cannot sell their properties.  Would-be buyers can’t get mortgages.  And the waiting list for social housing is increasing rapidly.

 

The social housing crunch has reached the point where 4.5 million people – 1.8 million households – have applied to social landlords for homes, but have not been allocated one.  That is hardly surprising as the supply of new social housing has dropped substantially.  About half of new affordable homes had been provided by developers of private housing scheme as a planning obligation – as those developments came to a halt, so did much of the building of cheap and social housing.

 

Put these constraints together with the catastrophe afflicting property development and the absence of mortgage finance for many home buyers, and it was inevitable that house building stagnated.  The Government aims to have 240,000 new homes built per year, creating an extra two million homes by 2016 and another three million by 2020.  Those aspirations now seem unachievable. 

 

Instead, house building is this year running at little more than a quarter of the Government’s target.  At this rate of progress, there are problems for the social housing, private rental and home owning markets.  The figures also suggest that pressures are likely to be stoked up to create another housing boom once the economy recovers – potentially again pushing prices to unaffordable levels.

 

The Government’s latest quango creation – the Homes and Communities Agency – is intended to address precisely these underlying stresses, increasing house building and taking a more coherent and effective approach to urban and rural regeneration.  The HCA brings together the regeneration body English Partnerships with the funding agency for social housing, the Housing Corporation.  It is being led by Sir Bob Kerslake, the former chief executive of Sheffield City Council who was widely seen as one of the most inspirational leaders within local government.

 

The first big announcement of HCA has been to set-up a scheme intended to build thousands of new homes a year, funded by institional investors.   The Private Rented Sector Initiative (PRSI) is akin to a Public Private Partnership for rental accommodation – finding a mechanism for large scale institutional funding for a social good. 

 

Sir Bob Kerslake told AB that he expects institutions to find the scheme attractive. “Our soft market testing has been encouraging,” he says.  “There is an appetite from potential investors that are keen on low risk, with sustainable income returns, with an opportunity of rising capital value at the same time.  The evidence we have had is encouraging.”

 

While HCA will not be drawn on how many homes it hopes will be built a year from the scheme, Sir Bob talks of attracting “hundreds of millions” of pounds.  He recognises that some regions are more likely to benefit than others. “I think, personally, that the demand is likely to be strongest in London and the South East,” he says.  “That doesn’t mean there won’t be demand elsewhere.”

 

To kick-start PRSI, the HCA is putting together a structure for investment, backed by guarantees from HCA, and is seeking bids from investors for schemes.  Sir Bob compares this action to the role universities initially took in creating a structure for private investment in student housing.  Eventually that market matured, with private investment continuing without universities’ support.  The HCA expects the PRSI to evolve in a similar way.

 

Housing specialists believe the HCA initiative is sensible.  Abigail Davies, head of policy at the Chartered Institute of Housing – representing housing professionals – says: “The recession has underlined the importance of finding ways to bring new investment into new housing and if the HCA initiative can pick up where sales to homeowners and buy to let investors left off it will provide a significant boost to the housing market. CIH is keen to see a flourishing private rented sector that can meet a wide range of housing needs and aspirations.  A test of success will be whether the PRSI can deliver new rented houses, not just flats, for households with a range of incomes.”

 

Richard Parker, partner and head of housing at PricewaterhouseCoopers, agrees. “There is no doubt about both the need and opportunity to establish a publicly structured private rented sector,” he says.  “If I had an issue currently it is about the scale of the opportunity that will be needed to attract institutional investors in a way that is meaningful.  If you want to attract institutional investors into the sector you do need an instititional lead.  I am pleased that HCA has taken that lead.  I would like them to be slightly more involved, rather than the facilitation role they have referred to.  That is, I think, the biggest issue at this stage.”

 

Parker also believes that HCA will have to focus on ways to control risk and to develop standardised investment vehicles, minimising transaction costs and maximising replicability across schemes.  Parker argues that the development of PRSI should not be seen as a substitute for policies that rescue and support the construction industry – which remains in need of its own funding mechanisms, given the collapse of bank lending to the property sector.

 

The HCA hopes that institutions such as Legal & General and Norwich Union, and some overseas investors, will find the project attractive – though neither L&G nor Norwich Union returned our calls to discuss their interest.  Company pension schemes may also be interested.  But local government pension funds contacted by AB indicated it was unlikely they would become involved in the forseeable future.

 

“The task now is to stimulate interest in the HCA’s proposals, encourage some innovative bids and ensure that we create some attractive proposals that provide solid returns for investors and more importantly, tenants,” says Liz Peace, chief executive of the British Property Federation, which is backing the scheme.  She says that the opportunity is create “a new kind of private renting”, which creates quality and more choice in the private rental sector, “at little or no cost to the taxpayer”.

 

In advance of the announcement of PRSI, it had been rumoured that the scheme would be specifically to finance new social housing schemes – it won’t.  But it is intended that there will be a mix of tenants and HCA says it will launch other schemes to increase funding for social housing.  Even so, PRSI also offers a variety of social benefits. 

 

Any increase in the supply of housing stock will ease pressures and should enable more people in need, across the earnings spectrum, to obtain homes.  It also, points out the HCA, offers the potential of helping businesses operate more efficiently – labour markets would become more flexible and effective if there were more opportunity to move home, including to homes for rent that are desirable.

 

If PRSI works, it sounds like a real win-win.

 

 

FAST FACTS

 

New homes

Government target 240,000 a year

2007 – 174,900

2008 – 101,000

2009 –  65,000 (projection from first quarter)